Today’s column in the Fin.
There are three arms of macroeconomic policy. There are the two in the economics textbooks monetary and fiscal. And theres a third, Australian, arm of macroeconomic policy, or there could be with a bit of lateral thinking of which more in a moment.
The Reserve will be announcing further monetary policy easing today again taking its axe to the interest rates on your mortgage. And the Government has just fired over ten billion dollars from the fiscal cannon without (yet) breaking into red ink.
But things could get a lot nastier, so its good the government is becoming more resigned to those evil ‘d’ words ‘deficit’ and ‘debt’, the better to avoid the third ‘depression’. Most developed countries are in much worse fiscal shape than us and they’re loosening the purse-strings. Given our much stronger position . . . well, the expression ‘whatever it takes’ comes to mind.
But another economic institution weve built gives us a third front to fight on – compulsory super. Right now employers must contribute nine percent of employees wages into their employees super helping to increase their self provision while addressing Australias one major, enduring economic weakness our over-reliance on foreign borrowing. But right now, when we desperately need more consumption and investment to keep the economy ticking over it makes no sense.
So we should reduce compulsory super in the short term and reaffirm previous intentions to increase it in the long term. Legislation could be passed to reduce compulsory super contributions by (say) a third of the current nine percent. For those employees who didnt opt out and maintain their contributions, their employers would be required to pay any reduced employee payments into their normal wages.
Those who hadn’t opted out would have more cash to spend so they could do their bit to keep the economy moving. And get this. Because wages are taxed more heavily than super contributions, it would improve the budget bottom line.
Of course for a country running large foreign deficits, more consumption is only benign if its temporary (just as deficits are only good if theyre temporary). So temporary cuts to the compulsory rate should be accompanied by pre-commitment to restoring compulsory contributions not just to where they are now but to higher levels as was once government policy.
We should legislate for regular annual increases in contributions of (say) one percent to commence about a year after the initial reduction in rates. To make the point that theres no magic pudding, those increased payments should be shared equally between workers and employers.
I’d also give governments discretion to accelerate the increases, because there might be good opportunities to lift the compulsory rate faster than the pre-committed schedule most particularly the next time were breaking to stop a runaway economy (lets hope its not too far away).
Being unpopular, the power wont be used lightly. But why would it ever be used? Because when the authorities are slowing the economy, all the medicine in the cabinet tastes terrible. Higher taxes, lower benefits and spending or higher interest rates take your pick. And voters will more readily accept belt tightening if its palpably for their own good in this case, for their own retirement. Had we increased employees contributions to compulsory super in the late 1980s we could have avoided 20 percent interest rates and perhaps that recession we had to have. (This isnt just hindsight I’ve got the newspaper columns from the time to prove it).
Contributions should rise to at least 12 percent to fund retirement. By then I’d hope wed reformed tax concessions on super to make them fairer right now the flat 15 percent tax is great for the wealthy but barely concessional if that for lower income earners.
Singapore’s compulsory savings vehicle their Central Provident Fund offers a useful model, providing we cherry pick rather than copy slavishly. Theyve had absurdly high contributions recently around 40 percent. We should aim for perhaps half that rate, and as the funds swell above the twelve to fifteen percent thats needed for retirement we should broaden the uses one can put the money to as one can in Singapore particularly housing, education and possibly health needs.
And, as were contemplating how to get from here to that place I’d call ‘Singapore light’, we should go on using the super system as a macro-economic swing instrument of last resort. Just like Singapore did, increasing contributions in the 1970s to fight inflation and reducing them sharply in the mid 1980s and again in 1999 to fight recession.
For clarification, what does this sentence mean?
OK this is more interesting. However, how many are making more than the minimal super contributions so as to get the Costello tax break? Unless, the saving is really forced you won’t get much of a consumption bump.
The other issue is that the reduced super might just go into the mortgage. So there is no consumption increase there either.
That said, this change might really help the lower income segment in the economy so it could be a good thing.
It couldn’t hurt for Treasury to do some modeling.
“The other issue is that the reduced super might just go into the mortgage”
You’re the economist here, but surely any time the government makes more cash available to citizens, it’s going to result in more spending than would have occurred otherwise? Sure, it may also result in more saving, and higher levels of debt-payment, but for those that are inclined to do as such in the current economic circumstances, then there’s a reasonable chance they will cut back on consumption in order to do so – which is where extra available cash helps, as it allows those people to save more, or pay off debts faster, while maintaining existing levels of consumption. Further, if people are saving more and paying off mortgages faster, won’t this have a positive affect on the banks’ willingness to lend?
I rather like the idea of a law which reduces compulsory super in the short term, while beefing it up in the long term, although I too wonder a little for clarification on Sinclair Davidson’s query.
But I would strongly object to another increase to “at least 12 per cent to fund retirement” – unless you first do something about the unfairness of the tax system (something you seem to endorse.)
Wouldn’t employees also have to pay income tax on any temporary wage increase?
As Joshua points out, all this assumes that the de jure rate of super contribution in fact represents forced saving – which is precisely the point I keep taking issue with. There will be lots of offsetting behaviour at the margin when you vary the rate. Raising it during a boom in particular is likely to stimulate offsetting wage claims – exactly what you don’t want. There’s more merit in lowering it in a recession, but that’s partly because the whole compulsory super thing is welfare-reducing anyway.
As for the so-called “benefits” of raising it further in the long term, I won’t bore you with my oft-repeated arguments against it. The idea’s recurrent popularity has more to do with the power of vested interests than any public policy merit.
Fred, Sinclair,
You could try to prevent people not taking the super cut, but I doubt it’s worth it. (Perhaps I’m wrong – there might be something to think about there at the top end with richies salting it away in super, though I doubt you’d do any more than just save some Govt money – I doubt you’d push consumption much. But I digress.)
On assumption that people could take their wage cut and pay it back into (voluntary) super, it seems sensible just to let them opt out. So if they tick some box, their employer would be obliged to keep paying 9% of their wages into super.
Peter,
Yes, as suggested in the post, tax receipts from wages would probably go up by more than they went down from lower super contribution taxes. We’re looking at a fiscal contraction that stimulates the economy (presuming a reasonable propensity to consume).
I suspect that temporarily lowering the SGC for people under 35 or people under 40 to say 5 or 6 per cent might be better policy (a) because this age group would be most likely to spend the extra in their pay packets; and (b) because there is more time for them to catch up later with retirement savings than there would be for older wage earners.
(It’d need some tweaking of payroll software packages but this would (or should) be trivial.)
Agree with Joshua Gans #2, This could be modelled by Treasury (as if Treasury hasn’t already got enough on its plate!). It’s worth modelling.
I’m a bit concerned, however, that we’re all tempted to fire off all the ammo all at once – in the very first phase of a bad recession, when things are likely to be far worse next June or next December. We need to keep some powder dry and there’s every likelihood in my view that the downturn will run for a long while yet.
Paul,
I can understand the keeping the powder dry argument when it’s a one off effect – as it is with the $10.4 party we’re throwing next week. But a reduction in compulsory super is an ongoing effect – it could well build up over time as people habituate. Until you turn the tap off that is. I get mystified by the same ‘lets keep our powder dry’ argument with monetary policy. If you’re trying to loosen policy, there’s nothing like loosening policy – not keeping loosening in your pocket so you can loosen. That seems strange to me. But then just about everyone talks like that – so who am I to argue?